The Effect of Fiscal Decentralization on Municipal Fiscal Condition: An Empirical Study of Large American Cities

Abstract

Local governments’ ability to sustain a healthy fiscal structure and meet service obligations is critical in avoiding financial hardship. This study empirically tests the effects of intrastate fiscal decentralization on municipal fiscal health that is measured by cash solvency, budget solvency, and long-run solvency. The two key variables, revenue decentralization and expenditure decentralization, are constructed to represent intrastate fiscal decentralization. The panel dataset includes 100 large U.S. cities and covers fiscal years 2007 through 2016, which encompasses periods before, during, and after the Great Recession started in 2008. The model estimation is based on a two-way fixed-effect panel regression. The results show that an increased degree of state-local revenue decentralization is significantly associated with higher long-term solvency, while an increased degree of state-local expenditure decentralization leads to higher levels of cash solvency and lower levels of long-term solvency.

Budget Planning and Internal Control on Local Financial Accountability: Mediating Budget Absorption

“…This indicates that government OPDs have successfully implemented a budget system based on better performance improvement. (Wang & Cheng, 2023) Fiscal decentralization, efficiency, and effectiveness of budget absorption on local government financial reporting accountability, found that the effectiveness of budget absorption impacts financial reporting accountability. Muzahid (2019) discusses the effect of participatory budgeting, budget target clarity, and implementation of internal supervision on the managerial performance of local government agencies and their implications for financial accountability; the results showed the path coefficient value of the budget target clarity variable of 0.243.…”